We’d be wrong.

Creditors work the system to jail debtors

While we can’t be sent to a federal prison for ignoring bills, many states allow citizens to be popped into state or local lockups for unpaid debt. Savvy collection agencies use this process to do an end run around the Fair Debt Collection Practices Act. Here’s how it works:

• The collection agency sues the debtor, often in small claims court, with perhaps only a mailed summons (legal in some states, Illinois for example) or, worse, an imaginary notice referred to as “sewer service”
• The debtor tosses the paper threat unread or misunderstands its implications. The debtor automatically loses the case because he doesn’t show up in court. He’s ordered to pay the collection agency, and the judge issues a arrest warrant for failing to appear and/or make the court-ordered payments
• Mr. Debtor is dragged out of a PTA meeting on the outstanding warrant and goes to jail
• He makes bail, which is (amazingly!) set at the exact amount owed
• The bail is turned over to the creditor. Taxpayers foot the bill for arresting and jailing the “evildoer”
• If unable to come up with the money owed, Mr. Debtor rots in jail. According to a Minnesota Star Tribune article, an Illinois man was sentenced “to indefinite incarceration” until he paid his $300 lumber yard debt

What about mortgage lenders?

OK, so if you can be jailed over an old emergency room visit or credit card debt, can you be imprisoned for missing mortgage payments?

Today, nearly 40 percent of homeowners in default have not made a payment in at least two years, according to LPS Applied Analytics. So, if there was a way to put mortgage defaulters in prison, would mortgage lenders try it? The laws in one particular state make it possible.

Minnesota: Do not pass go, do not collect $200

According to the Star Tribune, Minnesota bill collectors can initiate a lawsuit without filing any court documents. If the debtor doesn’t respond, collectors can seize bank accounts or garnish paychecks without ever proving in court that the debt is owed.

The statutes reveal some good news and some bad news. First, secured debts like car loans and mortgages fall under different laws than unsecured medical bills or credit card balances. Missing a mortgage payment doesn’t trigger a bench warrant. But what if you end up in foreclosure?

Be afraid, be very afraid

If your lender initiates foreclosure by posting a notice in the newspaper (foreclosure by publication), the worst it can do is take your house. The majority of Minnesota foreclosures are of this non-judicial variety. However, if you get a summons related to your default, you’re going through the court system. If you lose your home in a judicial, court-ordered foreclosure, the lender can take a lot more than your house when your balance exceeds the foreclosure sale price.

Laws vary from state to state and even from county to county. In Florida, for example, lenders have five years to sue you and then 20 years after that to collect on it.

Every state allows some form of deficiency judgment under certain circumstances, and most provide some way for bill collectors to shoehorn you into jail. Massachusetts, for example, allows deficiency judgments, and doesn’t imprison people for not paying them, except when it does: you can be jailed in Massachusetts for “contempt of court.” And not paying a judgment is, you guessed it, “contempt of court.”

The five participating banks include:

1. Bank of America
2. Wells Fargo
3. JPMorgan Chase
4. Citigroup
5. Ally Financial

Who gets what?

Here’s a breakdown of how the $26 billion will be allocated:

• $17 billion will be spent reducing the principal of underwater borrowers who are behind on their payments. According to CNNMoney, the average principal reduction will average $20,000
• $3 billion will be spent refinancing borrowers who are current on their mortgages
• $5 billion will be paid directly to the states. From that money, those who were wrongfully foreclosed will receive up to $2,000. Of that $5 billion, $1.5 billion will go towards individual payments. The exact amount of the payments will vary depending upon how many participate. HUD expects 750,000 former homeowners to participate. “Other funds will be paid to legal aid and homeowner advocacy organizations to help individuals facing foreclosure or experiencing servicer abuses,” wrote Christie
• $1 billion will be paid to the FHA

Sorry Fannie, Freddie borrowers

For the first time in a long time, those with loans owned or guaranteed by Fannie and Freddie have been (at least partially) left out of a housing relief effort.

“The Federal Housing Finance Agency, which oversees the two government-sponsored mortgage giants, will not allow any balance reductions for loans insured by the companies under the settlement,” wrote Christie.

Important Q&As

I believe I was wrongfully foreclosed, how do I get my money?

Former homeowners who believed they were wrongfully foreclosed between 2008 and 2011 should contact their banks for further information.

When will I get my money?

It’s going to take awhile. The settlement will be sent to the courts for approval in the coming weeks. After that, the timeline is unclear. Officials are unsure how long the court-approval process will take, but HUD wants people to be paid within the year. The process could take as long as three years.

According to HSH.com’s latest Weekly Mortgage Rate Radar, rates on two of the most popular types of mortgages eased back even more, breaking new record low territory.

The average rate for conforming 30-year fixed-rate mortgages fell by 3 basis points (0.03 percent) to 4.00 percent, while conforming 5/1 hybrid ARM rates also decreased by 3 basis points, closing the Wednesday-to-Tuesday wraparound weekly survey at an average of 2.96 percent.

“While various mortgage relief proposals are still being formed, including the plan announced by the president last week, the best mortgage relief for many borrowers is right in front of us in the form of continual near- or actual record-low mortgage rates,” said Keith Gumbinger, vice president of HSH.com.

Average mortgage rates and points for conforming residential mortgages for the week ending February 7 were, according to HSH.com:

Conforming 30-year fixed-rate mortgage

• Average rate: 4.00 percent
• Average points: 0.25

Conforming 5/1-year adjustable-rate mortgage

• Average rate: 2.96 percent
• Average points: 0.20

How will the robo-signing settlement affect you?

Could the current interest rate environment and the potential national settlement of the alleged robo-signing scandal help more borrowers get loan modifications or refinances?

“If the attorneys general do get a nationwide settlement for poor foreclosure practices, more homeowners may get a chance to snag new mortgages at rates that provide real and lasting relief,” said Gumbinger. Some 40 states have signed onto the agreement, but there are still a few notable holdouts, including California, Florida and New York.

“Ultimately, any settlement will be paid for by all consumers, but it is expected that some homeowners in difficult straits will be offered better deals than the ones they have,” said Gumbinger.

“We’ve done this at least four times where there’s a new government program to help homeowners who have trouble with their mortgages,” said Boehner.

“None of these programs have worked,” he continued. “I don’t know why anyone would think that this next idea is going to work. All they’ve done is delay the clearing of the market. The sooner the market clears and we understand where the prices really are will be the most important thing we can do in order to improve home values around the country.”

Why government programs have failed

The question that ought to be asked is, “Why have government programs failed?”

For instance, in 2008–before the Obama Administration came into office–the government proposed “Hope for Homeowners (H4H),” a $300 billion effort to help the housing sector. The program was designed to allow borrowers to refinance into new, FHA mortgages.

So what did we get from this $300 billion program?

In fiscal year 2011, there were 632 H4H mortgages. That’s right: Millions of foreclosure filings were sent out in 2011 but only 632 owners–about one per state per month–were able to refinance through this program.

Speaker Boehner confuses the term “program” with “effective program.” Yes, H4H was a program and yes the FHA was authorized by Congress to insure up to $300 billion in new loans. But in practice, the program had no possibility of success–and many suspected it from day one.

Why H4H failed

Under H4H, struggling borrowers would be refinanced into a FHA mortgage they could “afford.” Then, first-lien lenders would have to write down a portion of the borrower’s principal and second—lien lenders “must agree to release their outstanding mortgage liens.”  

But if the lender is being paid on time, why should it agree to lose money by allowing this refinance? Not only would the interest rate diminish and a portion of the outstanding principal be forgiven, second lien holders are getting nothing. Furthermore, the program was also designed for Uncle Sam to receive 50 percent of your home’s appreciation.

Why Boehner shouldn’t delay

Speaker Boehner might want to take a look at his own state to see why support for the housing sector should continue. According to RealtyTrac, pre-foreclosures in Ohio were up 43 percent last year. Only Michigan (68 percent) and North Carolina (44 percent) did worse. The foreclosure discount in Toledo is now 50 percent, meaning much of Ohio’s home equity has been destroyed.

Mr. Boehner, of course, did not slow the passage of the Temporary Payroll Tax Cut Continuation Act–legislation which delayed an increase in the payroll tax for two whole months but by law will raise both the FHA annual mortgage insurance premium and the cost of Fannie Mae and Freddie Mac services.

Given such realities, there’s no need to wait, no benefit to delay further. The market is already cleared out–just look at Speaker Boehner’s home state.

Two weeks ago, mortgage rates flared higher thanks to a warmer set of economic data. Last week, that increase “was cut off at the knees” by a softer-than-expected fourth quarter GDP report and a Federal Reserve outlook that left a lot to be desired, explained Keith Gumbinger, vice president of HSH.com, in the latest Market Trends newsletter.

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The Fed not only pushed back their expectation for when interest rates will rise, they also indicated that more mortgage or bond-buying programs might come into play this year.

The result: Mortgage rates fell to new record lows

According to HSH.com’s broad-market mortgage tracker–our weekly Fixed-Rate Mortgage Indicator (FRMI)–the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming and jumbos) declined by 10 basis points (.10 percent) from the previous week, sliding to an average 4.18 percent, a new record low.

The FRMI’s 15-year companion shed nine basis points (.09 percent) to finish the weekly survey at an average 3.46 percent, also a new bottom.

FHA-backed 30-year mortgages declined by just three hundredths of a percentage point to 3.84 percent, while the overall average for 5/1 Hybrid ARMs decreased by seven basis points to crack the 3 percent mark and end the week at 2.99 percent.

Conforming 30-year fixed-rate mortgages matched their previous low of 4.01 percent, but jumbo 30-year fixed-rate mortgages marched into new record low territory with an eleven basis point drop to 4.49 percent.

The availability of low mortgage rates hasn’t been the problem in recent years. It has been the access to these record-low rates. The latest opinion survey of senior loan officers conducted by the Federal Reserve found that for prime quality residential borrowers, conditions have eased slightly. “Since many of these loans follow Fannie/Freddie or FHA underwriting standards (which have not changed), we can only be left to conclude that the easing came in non-conforming (jumbos) and for products more likely to be kept in portfolio (ARMs). Any easing of standards would no doubt help the housing market,” wrote Gumbinger.

So what should we make of all this?

We have been firmly of the mind that the economy has been improving for months, and the data continues to bear this out. In “normal” times, an improving economy should send rates on the rise. “We are still very far from whatever might pass for normal these days, since the job market is still weak, inflation is happening at a measured (perhaps even declining) basis, and there are certainly still plenty of issues which might trip up the recovery,” explained Gumbinger.

“At present, no one knows, but at some point the markets may begin to express that a Fed committed to low rates for years to come is not in their best interests, and a change will come. Until then, rates will remain favorable.”

Record-low rates present incredible fiscal opportunities to borrowers, however, potential borrowers should keep in mind that the lowest interest rates usually accompany the bleakest of economic reports, and to the extent that the economy is strengthening, the likelihood of perpetual new “record lows” diminishes, explained Gumbinger.

We expect to see mortgage rates rise a little this week.

Estimates for the January report varied. While a group of economists surveyed by MarketWatch predicted 121,000 new hires last month, HSH.com expected 180,000.

Both November and December’s job numbers were revised higher, meaning January’s numbers could be even more impressive than they already are.

Time to celebrate?

Despite the best job numbers we’ve seen since last April, many experts warn that while this is certainly another sign that the economy is inching its way in the right direction, not to get too excited over the latest employment report.

“There are some caveats to what’s a pretty strong report,” Sam Bullard, senior economist at Wells Fargo, told MarketWatch.com. “I am still cautious as to whether we have stepped up the level of hiring to the 200,000 to 250,000 range.”  

Keith Gumbinger, vice president of HSH.com, echoed those sentiments to me in a recent email.

“It’s a truism that ‘jobs beget jobs,’” wrote Gumbinger. “More people hired means increased consumer spending (with some lag) which tends to promote business profits, confidence and therefore promotes more hiring to meet increased demand. In this environment, though, I’d bet that there will be a rather more cautious approach. The economy and consumers are still very vulnerable to shocks.”

Mortgage rates to rise

The markets have reacted quickly to today’s report. The Dow Jones Industrial Average added 100 points in the early going, according MarketWatch, and 10-year Treasury yields were also on the rise, increasing by 11 basis points earlier this morning. “That should bump mortgage rates up a little bit as we head into next week,” said Gumbinger.

How much of an increase are we talking about?

One strong monthly showing isn’t enough to put serious upward pressure on mortgage rates. That said, as long as the economy remains on an upward trajectory and deflation doesn’t become a cause for concern, mortgage rates aren’t going to decline on a consistent basis. Should the economy continue to strengthen, we may even see the Federal Reserve change their “2014” tune before too long, said Gumbinger.

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Is this proposed refinance plan–that can potentially save you $3,000 a year–a game changer or a pipe dream? At the moment, I—along with many others—am leaning towards the latter. Why? Plain and simple: it requires Congressional approval.

The president’s widespread housing effort requires banks to pay a fee to cover the plan’s estimated cost of $5 billion to $10 billion. Diana Olick of CNBC said Congressional approval alone is the biggest obstacle facing this program—one that could deem it over before it even begins.

Here are the nuts and bolts of the new “streamlined” refinance effort, open to all borrowers except those with loans in excess of $729,750.

To qualify, according to the White House fact sheet:

• Homeowners must be current on their mortgage: Borrowers will need to have been current on their loan for the past 6 months and have missed no more than one payment in the 6 months prior.
• They meet a minimum credit score. Borrowers must have a current FICO score of 580 to be eligible. Approximately 9 in 10 borrowers have a credit score adequate to meet that requirement. 
• They have a loan that is no larger than the current FHA conforming loan limits in their area: Currently, FHA limits vary geographically with the median area home price – set at $271,050 in lowest cost areas and as high as $729,750 in the highest cost areas
• The loan they are refinancing is for a single family, owner-occupied principal residence.  This will ensure that the program is focused on responsible homeowners trying to stay in their homes.

Limited paperwork

The streamlined refinance process means that no new appraisal or tax form is required. Lenders will only need to confirm that you are employed to proceed. According to the White House, “Those who are not employed may still be eligible if they meet the other requirements and present limited credit risk. However, a lender will need to perform a full underwriting of these borrowers to determine whether they are a good fit for the program.”

Aimed at underwater loans

The president’s new refinance plan is designed to even include the most underwater borrowers (above 140 percent LTV), but lenders must agree to write down a portion of that principal before borrowers can qualify. Also, a separate fund would be created to track these streamlined refinances and to better help manage risks in order to make sure the Mutual Mortgage Insurance fund is not disturbed.

Keith Gumbinger, vice president of HSH.com, spoke with Kathleen Pender of the San Francisco Chronicle this morning calling the president’s plan a “politically savvy stroke. Virtually free, hassle-free refinancing for everybody, paid for by someone else.”

In conclusion, even if this expanded refinance plan makes it through Congress, it probably won’t look much like it does today. Furthermore, a program such as this can’t be implemented overnight, it will likely take months.

If this program is the answer to our nation’s housing woes, “where was it three years ago?” asked Gumbinger?

“Homebuyers could purchase protection from the government for a one-time fee, say 1 percent of the house purchase price, or $2,000 on a house selling for $200,000,” wrote Wilcox. “The fee could vary with the risk of house price declines in each area. The plan would be open to all buyers.”

Wilcox continues, “At the end of three years, the government would automatically mail checks to protected homeowners if average house prices in their area were lower than when they purchased their homes. (No decline, no check — just like auto insurance.)”

What could possibly be wrong with such a plan?

There are several implications to the Wilcox plan, none of them good.

First: One of the biggest political issues of our time is the incessant cry to make government smaller, to cut government spending. The Wilcox plan would increase the size of government because someone would have to estimate home values, mortgage rates, administer the program and issue checks. Wilcox wants the government to offer down-payment protection while many in the private sector want fewer government departments, agencies and programs.

Second: The fee to participate is a one-time charge equal to 1 percent of a property’s fair market value. If local prices decline 2 percent, who will pay the difference?

Wilcox wrote, “Only the federal government can readily offer a down-payment protection program that is large enough to raise actual and expected future house prices, which would in turn lower how much the buyer would have to pay. In addition, unlike private providers of protection, the government reaps substantial extra revenue when its policies raise national income. Even if the taxpayers provide some subsidy, to the extent that the economy does better, they would get some benefit.”

It’s easy to suggest that economists can estimate future values and that such models can protect taxpayers against excess claims. But economists are often wrong.

If you want a perfect example, just look at the projections made by the Federal Housing Finance Agency in 2010. According to FHFA–the agency that oversees (runs) Fannie Mae and Freddie Mac–there were supposed to be 6.467 million existing home sales in 2011. The actual number was 4.26 million, according to the National Association of Realtors, a difference of 2.21 million home sales.

Or, look at new homes. The FHFA said there would be 1.01 million housing starts in 2011. The Census Bureau says there were an estimated 606,900 housing starts in 2011.

The idea proposed by Wilcox can’t possibly work if the economic projections needed to avoid financial calamity are incorrect. We could get lucky and see home values rise to the point where no government down-payment guarantees are paid out–or we could be wrong and owe billions of dollars in borrower claims.

Given the country’s current political climate, it seems unlikely that there would be much support for a new government housing effort that would expand the bureaucracy and potentially create billions of dollars in new liabilities. Certainly no company in the private sector would offer such a nationwide plan, even with the Wilcox model now on the table.

The Fed’s influence on mortgage rates

Armed with this news and with Fed Chairman Ben Bernanke commenting at his news conference afterward that a QE3 is certainly possible sometime this year, markets turned. Mortgage rates were rising somewhat in the early part of the week, goosed by warmer economic news, but reversed course to some degree.

Why?

If nothing else, it reinforces the idea that the Fed expects the economy to continue to experience sub-par growth which will require additional assistance, and that price pressures are low and will likely remain that way for some time.

Mortgage rates tick upward

HSH.com’s broad-market mortgage tracker–our weekly Fixed-Rate Mortgage Indicator (FRMI)–found that the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming and jumbo) rose by six basis points (.06 percent) from the week prior, climbing to an average 4.28 percent, closing January just shy of where it began.

The FRMI’s 15-year companion increased only two basis points (.02 percent) to finish the weekly survey at an average 3.55 percent. Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages rose by just a single hundredth of a percentage point to 3.87 percent, while the overall average for 5/1 Hybrid ARMs increased by two basis points to end the week at 3.06 percent.

QE3 will depend on the economy

Will the Fed start a new program of purchasing Treasuries and mortgage-backed securities? If the economy falters, that would be a consideration, especially given that this year is an election year and getting meaningful fiscal support from Congress is unlikely.

That said, the economy has generally been on an improving bent after suffering considerably early in 2011, with all kinds of weather-related interruptions capped off by the Japan disaster. After growing just 0.4 percent in the first quarter of 2011, the path for GDP has been an improving one, with 1.3 percent in the second quarter, 1.8 percent in the third and 2.8 percent in the fourth, according to the advanced report.

The present rate is solid enough, but insufficient to bring down unemployment very quickly, and with euro headwinds forming for 2012, the upward march of the economy might be disturbed, and the Fed would feel compelled to act. Should economic growth continue on even a modest upward trajectory, the Fed is more likely to hold off, since these programs don’t come without consequence of inflation or even more lasting market distortion.

Is the Fed really worried about inflation?

Mr. Bernanke mentioned that he would think it acceptable if inflation ran above the Fed’s 2 percent level for a time, if it was to promote stronger job growth. That’s fine, but we wonder how the market would react to a Fed who states a goal and then feels they can ignore it. Admittedly, that’s not much of a problem at the moment when inflation is easing, but should the reverse occur the market might not like it. Inflation is a monetary policy issue; if it runs hot, failing to control it can cause serious damage, and often worse trouble ensues when it must be corralled again.

Fed goal: Revive housing

The Fed’s commitment to a low interest rate policy (and possibly a QE3) is aimed squarely at reviving the housing market. Sales of new homes came in at an annualized rate of 307,000 in December, down by some 7,000 units from November. While it was the worst year for new home sales since records were kept (1963), we have been encouraged by both the stable pattern of sales and also that inventory levels are at record lows (157,000 units built and ready for sale, about 6.1 months worth at the present rate of absorption). With lows of 281,000 annualized units and highs of 316,000 annualized, we are closer to the top than the bottom of a weak range, so any increase in demand must be met with new construction.

The Fed’s dark assessment

The Fed’s assessment of the economy over the next few quarters is no doubt darker than the conditions we are experiencing. The effects of a slowdown in Europe have yet to be fully felt here, which may trim exports to a measurable degree, and the economy here is by no means firing on all cylinders and is less able to endure any kind of shock.

That being the case, of course the Fed would say that they stand ready to do more, but all the while, it’s a safe bet that they would rather not. The value of the Fed’s previous actions is not nil, but it is limited, as is the Fed’s ability to manage issues better done from the fiscal side rather than the monetary. That is to say, low interest rates are great for some things, but they only go so far.

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I was working from home, just south of Reno, Nev., last Thursday when I got a reverse 911 call from the sheriff’s office, telling me that a large wildfire was moving quickly in my direction and that I should get to an evacuation center right away. My mind went blank, my knees turned to water and my hands started to shake. I grabbed my dogs, cat and laptop and fled for safety.

Here are 10 things I learned from my evacuation:

1. Line up a decent place to stay. Yes, there will be evacuation centers, but how well will you sleep—and do you want to sleep–on the floor in a room with hundreds of people?

2. Exchange keys and phone numbers with neighbors. Under mandatory evacuation in Nevada, they can’t force you to leave, but if you’re away (at the office, for example), you’re not allowed to reenter your neighborhood. Friends still at home may be able to grab what’s most precious to you–whether it’s your cat, your jewelry or your bowling trophies—but there are no guarantees.

3. Compile emergency phone numbers. Program the numbers to hotels, animal boarding facilities, food delivery, etc. into your phone. You’ll want to call and reserve a room before a thousand other people take them all.

4. Drive very, very carefully. I saw panic-stricken drivers running lights, tailgating, even driving the wrong way down one-way streets. A five-car-pileup happened right in front of me.

5. Put a smart evacuation kit together. You might be gone for days, weeks or even forever. I grabbed clothes and toiletries, but I forgot to include something respectable to wear at night when I had to take my dog out. If you stay in an evacuation center, a see-through nightgown is probably not what you want to be wearing. Also, don’t forget about your animals–I grabbed food, treats and leashes, but forgot the cat box.

6. Take your meds. Carry your prescriptions with you. I packed mine in a big pile of things that I didn’t have ready access to. I ended up wheezing and covered in hives.

7. Create a video record–now. This will be helpful if you have to collect on your insurance policy. Zero in on big-ticket items, including expensive things in your closets and basement; photograph recent home improvements that affect your home’s replacement cost. Load this record onto your computer.

8. Back up your computer. I use Mozy, which is free, online program that backs up automatically twice a day. Even if my laptop burns up, I can replicate it on a new machine in about an hour. I have had to do this and it really works.

9. Make a list. I went completely blank when figuring out what I should take with me. My family heirlooms would have been gone forever had my home burned. Rank the items on your list from most important to least important. You’ll be able to save as much as you can, and more importantly, you’ll save the right things.

10. Be grateful. In all, 29 homes were destroyed and 10,000 residents had to leave their homes. We survived, and my house is still standing. The most important thing I learned from my evacuation is that I’m not terribly attached to any of my possessions. That discovery made me stronger, and was well worth the terror and inconvenience.

This entire list can be taken care of in about two hours. Take care of them this week, and share this list with your friends and neighbors. That way, you’ll all be prepared and looking out for each other.